Analysts of the Central Bank considered the price of oil inflated in the new budget rule

The base price of oil ($60/bbl) and production volume (9.5 million b/d) are overstated in the parameters of the new budget rule proposed by the Ministry of Finance, analysts from the Bank of Russia believe. Their position is outlined in a new review, Modification of the Fiscal Rule: From Conservatism to Softness.

The new concept of the budget rule has not been officially announced. In public comments on this matter, the Ministry of Finance responds in a standard way that it is being worked out. Central Bank Chairman Elvira Nabiullina also evasively answered the question about the rule earlier, saying that there are different proposals. In their review, analysts of the Central Bank, criticizing the parameters of the rule, refer to media publications. Earlier, Vedomosti wrote about the option proposed by the Ministry of Finance with a cut-off price of $60 per barrel.

“Based on the expected dynamics of the cost of profitability of shale producers and the price of oil, which balances the state budgets of the main oil exporting countries, the price of Urals oil is $60/bbl. seems to be significantly higher than the equilibrium level for the medium and long term, ”the analysts of the Central Bank note in the review. The Bank of Russia sees similar, albeit noticeably lower, risks in terms of oil production if it is fixed at 9.5 million bpd.

This means a high probability of the formation of reserves in the NWF during periods of relatively favorable external conditions in volumes insufficient to cover the negative gap between actual and basic oil and gas revenues during periods when the oil price is below the base, the regulator’s review says.

The Bank of Russia considers maintaining the current level of the base oil price and reducing oil production as a more rational option, this is necessary to maintain the long-term stability of public finances and maintain the ability to pursue a countercyclical budget policy in the new realities.

“An alternative option could be to maintain the current mechanism, within which the volume of oil production is not fixed for the calculation of basic oil and gas revenues,” analysts of the Central Bank say.

The Ministry of Finance is ready to start buying foreign currency for oil and gas super profits in a test mode in the near future – as soon as the concept of the updated mechanism is approved, Vedomosti wrote earlier, citing sources. New parameters must be agreed upon before the draft budget is submitted to the State Duma – this year the government must do this before October 1. Sources of Vedomosti reported that one of the comments on the proposal of the Ministry of Finance is related to the projected oil price in the future.

The Ministry of Finance announced the suspension of the old budget rule in early March. Prior to this, Western countries, as part of the sanctions, froze about $300 billion of the gold and foreign exchange reserves of the Russian Federation, including funds from the NWF. The fiscal rule was that additional revenues from the high price of oil (the cut-off level is $44.2/bbl in 2022) were used to buy foreign currency and gold to accumulate in the NWF. In the spring, the authorities secured the possibility of spending additional oil and gas revenues for priority purposes, and not just to cover the budget deficit.

In the draft “Guidelines for a unified state monetary policy for 2023 and the period 2024 and 2025” The Bank of Russia indicated that the Ministry of Finance was considering the possibility of buying Chinese yuan, Indian rupees, Turkish liras and other currencies of friendly countries to replenish the National Welfare Fund (NWF) within the framework of the budget rule. As Vedomosti wrote earlier, only the yuan is considered by the ministry as the currency for interventions.

The volume of the NWF as of August 1 was 12.2 trillion rubles. ($ 198.3 billion), the liquid part (funds in bank accounts with the Central Bank) – 8.7 trillion rubles. ($ 141.3 billion), follows from the data of the Ministry of Finance.